Uncertainty and the Disappearance of International Credit

   (313 K)

We show that increased uncertainty about the size of an emerging market's external debt has a nonlinear and potentially large adverse effect on the supply of international credit offered to them. We also show that if international creditors are first- order risk averse, attaching greater weight to utility derived from bad outcomes than from good ones, a moderate increase in uncertainty about debt overhang or about other relevant factors affecting repayment prospects-- can cause the supply of credit to dry up completely. We therefore offer one possible explanation for why emerging markets may find themselves suddenly cut off from international capital markets.

Published:

• Proceedings, Federal Reserve Bank of San Francisco, 1999 Pacific Basin Conference, September 23-24, 1999 ,
• as chapter 5 in "Financial Crises in Emerging Markets," edited by Reuven Glick, Ramon Moreno, and Mark M. Spiegel, (Cambridge: Cambridge University Press, 2001): p. 167-190

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